Supply and Demand Rule O.C. Housing

A large demand and a small supply continue to further complicate the housing market…especially in Orange County. 

  • According to the state Legislative Analyst’s Office, Orange County needs to build 7,000 more homes this year than it is currently building in order to meet the demand for housing
  • The median price for new construction has skyrocketed to an all-time high of $909,000, thanks to homebuilders leveraging the insatiable demand
  • This supply and demand makes even the least expensive housing in California more costly than most—with median home prices double that of the national average
  • With Californians spending an average of 27% of their income on housing (4% higher than the national average), these growing housing costs contribute to poverty and residents being four times more likely to live in crowded conditions

While these facts are a hard pill to swallow for most Californians, the truth is that there are land constraints which prevent a rapid increase in affordable housing options as well as a voracious demand from those who need to live close to their jobs. Until we get these two spectrums aligned, the state’s economy may falter as extreme housing costs make it harder for companies to recruit and retain top notch employees.


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Millennials Have the Power to Shape Housing’s Future

A flood of Millennials entering the housing market would help give it the boost it needs to realize its full potential. However, there are a few barriers preventing this from happening—the biggest one being this group of potential homebuyers seems to have difficulty coming up with the down payment.  In fact…

  • A recent survey by ClosingCorp revealed that two out of every three millennials looking to purchase a home doesn’t understand what closing costs are
  • Aside from a lack of mortgage knowledge,  an exorbitant amount of student debt is the a major deterrent from saving a down payment
  • Over the past five years, as many as 13% of millennials have received down payment assistance from their parents
  • More than 75% of the group whose parents provided the down payment said that they were only able to purchase a home because of this assistance
  • Other forms of parental aid came by way of: helping with closing costs, co-signing the mortgage, paying down student debt, letting kids move back in with them while they save money, or covering their rent for a period of time

With these kinds of stats, it appears that parents might just be saving the housing market one millennial at a time.


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California Housing is Booming

After a slow start to the year, the California housing market has officially hit its stride.

  • In February, pending home sales skyrocketed…posting the first double-digit annual gain since 2012
  • Pending Home Sales index jumped 24 percentage points from January to February —signaling the greatest monthly growth in seven years —thanks to a huge increase in signed contracts
  • Positive forecasts for the job market support the prediction that housing will continue its boom and that new home sales will skyrocket throughout 2015
  • Southern California pending home sales had its biggest year-to-year change in more than three years with a 15.2% increase

Overall, the new and pending home sales surging combined with a three-year high in February confirm that the shaky start housing saw in January was just a glitch in the overall market and that spring sales will continue to grow.


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Home Sales Rebound across the Board

After a disappointing January—with existing home sales posting double-digit drops—February sales are giving home buyers hope that housing will continue improving during spring. In fact, in Orange County, sales jumped 10.9% in February and San Diego county saw a 14.8% increase over January!

And that’s only existing single family sales.

New single family construction starts are projected to climb 10% over 2014 numbers. And new multi-family construction starts are estimated to rise a whopping 20% this year. Factor in that home building giant Lennar Corp beat Q1 earnings expectations despite construction efforts being hampered by difficult weather across the country, and it’s easy to see that things are moving in the right direction.

Plus, California as a whole is improving.  It’s not just due to the mild winter either. Job growth contributed to home sales posting the largest February increase since 2012…with more than a half-million jobs added.  And, according to a recent Fannie Mae sentiment survey, mortgage lenders are optimistic and anticipate that mortgage demand will increase significantly over the next three months.  Especially with mortgage interest rates still under 4%. So if you’re thinking about buying a home, now is a great time to get in before demand and rates both go through the roof. 


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Foreclosures and Distressed Sales Increase

Foreclosures across the nation may have reached their lowest level since November (as well as the third lowest notch in 7 years), but that doesn’t mean it’s sunshine and rainbows in Cali.

Despite a falling foreclosure rate across the U.S., many California homeowners in low-priced homes are trapped upside down even as the market continues to recover.

Take Orange County for example. Even though home values rose 1% in February, distressed sales still made up 8% of all home sales. The number of distressed sales demonstrates that not all homeowners are able to refinance…even with increased equity. 

Even this far into the recovery, overall home values continue to rebound while often the lowest-priced homes are left behind—stuck in negative equity. This is thanks in part to the fact that higher negative equity rates have become the new norm.

And while California foreclosures have improved slightly after posting a 43% annual increase (and 22-month high) for 2014, even with the improvement metros like San Diego saw an 8% YoY increase in foreclosures during January 2015 and Los Angeles posted a whopping 34% YoY foreclosure gain during the same time frame.


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Could Low Down Payment Programs Sink Housing Again?

Depending on who you ask about low down payment programs, you’re bound to get varying opinions. While some believe that zero- to low-down-payment loans were partially responsible for causing the housing bubble, others think that these programs are much needed to help grow housing.  Here’s why many believe that an increase in 97% loan-to-value (LTV) lending returning to housing isn’t something to fear:


  • Today’s housing market isn’t the same as it was in 2007. An increase in lending regulation has addressed many of the issues which spurred housing’s demise eight years ago.
  • If homeownership rates are to increase, low down payment programs need to be available. For example, the median price home price in Orange County in January was $674,340.  This means that for a conventional 20% down payment, a whopping $134,868 would be needed.  This amount just isn’t realistic for most first-time homeowners.
  • Low down payment programs are needed for the housing and mortgage industries to thrive. They aid in allowing renters to transition to homeowners, planting roots and helping to establish well founded communities.

So as you can see, the 97% LTV programs are much more likely to keep housing afloat, than to sink it given the current market and economic environment.


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Why 2015 Could Be Housing’s Best Year Since 2007

Even though January and February were lackluster at best, experts are saying that they expect 2015 to be the best time for home sales and new construction in more than eight years. Here’s why:

  • Labor markets are improving: more than 3 million jobs were added between February 2014 to February 2015, marking it the fastest pace for growth experienced since 2000. This means that wages are growing and income is rising
  • It’s looking up for millennials: those ages 25 to 34 have already begun to see prospective job availability improve significantly
  • Rising rents: rent costs are predicted to rise 4% or more this year. This means that for many, homeownership will make a lot more financial sense. Especially now that home price appreciation levels have tapered off quite a bit from what we saw in 2013 and 2014
  • Expanded credit: with lending loosening its reins a little—allowing more 3% down programs to be utilized—and mortgage credit expanding, buyers should have an easier time qualifying for lending than in years past.



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Signs the Near-Zero Interest Environment Will End

The housing industry has enjoyed the low interest rate environment that the Federal Reserve implemented to help grow the economy. However, now that things have improved, interest rates may rise once more. Here are a few economic factors that might signal an interest rate hike is around the corner:

  • Wage increases: when wages grow significantly, it shows that corporations have more confidence in the economic environment—signaling low interest rates are probably no longer needed to stimulate growth
  • Job growth: higher number of employees means additional, steady income that people can use to invest in housing
  • Rental demand: even though rent prices and the appetite for rental properties have experienced amazing gains over the past few years, when the wage increases and job growth come to fruition, demand will turn to housing as the workforce looks toward homeownership

Once these things occur and the near-zero interest levels begin to rise, so will the relatively low mortgage rates we’ve grown accustomed to. So if you’re looking to buy a home this year, pay close attention to the factors above and lock down your rate before the interest rates climb too high.


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3% Down Programs Are Making a Come Back

Despite mortgage rates falling slightly last week, hitting a 21-month low, mortgage applications remained relatively unchanged. So it appears that homebuyers might need more reason to get excited about jumping into the market than just low interest rates.

And now they have it, because the Mortgage Credit Availability Index (MCAI) rose nearly 1% from January to February—indicating a loosening of the mortgage credit available to buyers. This expansion of lending primarily stemmed from further growth of Fannie Mae’s 97% Loan-to-Value (LTV) products as well as a rise in jumbo loan programs.

In fact, according to a statement released by Mike Fratantoni, chief economist at the Mortgage Bankers Association, more than half of investors are now offering a 97% LTV program. And Freddie Mac just announced that its program will be available in mid-March.

These 97% LTV programs—like Freddie’s Home Possible Advantage and Fannie’s My Community Mortgage—are designed to assist buyers who may not be able to put more than 3% down on their property. These low down payment programs are gaining popularity now that mortgage standards are loosening slightly and credit availability is increasing.

So if you’re looking to purchase a home with a low amount out of pocket and take advantage of the increase in mortgage credit availability, contact your loan officer today to find out what programs are best suited for your needs.


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Is it a Sellers’ or Buyers’ Market?

With sales sliding -30.6% in Orange County from December to January, many are wondering if now is a good time to buy or sell.
Granted, interest rates are bouncing between high 3s and low 4s, so there definitely an incentive to get into the market. But is it a buyers’ or sellers’ market?  

Here are a few events that will provide some insight:

California homes that sold in January, sold for an average of 11% below asking price— down just a little from the 13% below asking price that we saw in December. This is in line with the fact that the number of homes where sellers reduced the listing price has risen 31% from January 2014. It’s a strong signal that sellers’ expectations are not aligned with buyers’ expectations.
The number of properties that received multiple offers in January fell six percentage points to just 58% of sales—down from 64% during the previous year.  The amount of homes in January that sold above asking price dropped to just 16%. This is way off the 40% high we experienced last March.  
The average time unsold inventory stayed on the market in San Diego remained unchanged at 35 days in both January 2014 as well as in January 2015. However, California as a whole experienced an increase in unsold inventory during this timeframe from 4.3 months to 5 months on the market. Orange County increased from 62 days in January 2014 to 72 days in January 2015.

When you factor in an increase in the number of houses that are selling below asking price, not as many sellers receiving multiple offers, and only a small percentage of properties selling above listing price, we can determine that these signals indicate we are in a low-competitive buyers’ market.


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